J. Alexander's Holdings, Inc.
Q3 2018 Earnings Call Transcript

Published: 8 Nov 2018

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the J. Alexander's Holdings, Inc. Third Quarter 2018 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions]. It is now my pleasure to introduce to you Mr. Tom Lawrence for introduction of today's speakers. Please go ahead, Mr. Lawrence.

[Tom Lawrence:]

Thank you. We appreciate your interest in joining us on this conference call to discuss results of J. Alexander's Holdings, Inc. for the third quarter of 2018. By now, everyone should have received a copy of the news release that was distributed yesterday afternoon. If anyone does need a copy, it is available on J. Alexander's website at www.investor.jalexandersholdings.com, or you can call Katherine Berendt at 615-244-1818, and she will send you a copy immediately. Before I turn the call over to Lonnie Stout II, President and CEO of J. Alexander's Holdings, Inc., I remind you that all statements made in the news release and during this conference call, other than statements of historical fact, are forward-looking statements. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The company believes that its expectations are based on reasonable assumptions. However, these forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the company's actual results, performance or achievements or industry results to differ materially from the company's expectations of future results, performance or achievements expressed or implied by these forward-looking statements. Additional information concerning those risks, uncertainties and other factors is described under the headings Forward-Looking Statements in yesterday's press release and in Risk Factors and other sections of the company's annual report, Form 10-K for the year ended December 31, 2017, and subsequent filings with the SEC, which you can find on the SEC's website and the Investor Relations section of the company's website. For non-GAAP measures disclosed in this call, the related GAAP measures and other information are available in the financial and statistical summary accompanying the press release dated November 7, 2018. In addition, the company's past results of operations do not necessarily indicate its future results. Finally, we wanted to let people know that the information statements made during the call are made as of the date of the call, November 8, 2018. Those listening to any replay should understand that the passage of time by itself will diminish the quality of the statements. Also, the contents of the call are the property of the company, and the replay or transmission of the call may be done only with the consent of J. Alexander's Holdings, Inc. It's now my pleasure turn the call over to Lonnie Stout for his opening remarks.

[Lonnie Stout:]

Thank you, Tom. I'd like to welcome everyone on the call this morning. Mark Parkey, our Chief Financial Officer is here, and I'll introduce him for his part of the presentation later. We are pleased with our results for the third quarter ended September 30, 2018. As a restaurant company, where a relatively small but loyal group of our guests drive a significant portion of our revenue. The disruption in their routine in the summer months usually is a typically - a low point in our annual operating cycle. This factor, coupled with the fact that much of the hurricane season occurs in the summer months, can at times wreak havoc on certain markets. So it really causes us to be encouraged when the third quarter is in our rear-view mirror and the fourth quarter arrives. We are pleased with the increases in same-store sales for both of our restaurant concepts for the third quarter of 2018. For the third quarter, net sales of J. Alexander's Holdings reached $56,730,000, a gain of 5.3% over the $53,879,000 reported in the comparable quarter of 2017. Same-store sales in our J. Alexander's/Grill restaurants rose 2.6% from $105,900 weekly average in the third quarter of '17 to $108,700 weekly sales average for the third quarter of 2018. At our Stoney River Steakhouse and Grill restaurant, same-store sales advanced 5.6% from $68,000 in weekly average sales in the third quarter of 2017 to $71,800 for the most recent quarter. As expressed in our press release yesterday, the primary concern we have in our Jack's Grill's group is the persistent soft sales in some of our newer restaurants. In addressing this issue, we are aggressively implementing various strategies to heighten guest awareness as we enter the very important 2018 holiday season in order to drive sales and generate more guest trial. We are convinced that once guests figure out what we have to offer in their market, after visiting us a handful of times. As in the past, they will help us build the foundation for long-term success in these newer restaurants. Over at our Stoney River Steakhouse and Grill group, we continue to report a solid performance, posting in another strong quarter with respect to both increased guest counts and sales. As noted in previous quarters, while we have taken various measures operationally to build guest counts and sales at certain locations, we are pleased to report that most of the increase generated within this group is organic. Due to a more normalized beef market in 2018, coupled with the continued strong momentum we have been experiencing across most of our Stoney River locations, we are optimistic about our prospects as we enter the always-critical holiday season. The company recorded a loss from continuing operations before income taxes of $713,000 in the most recent quarter compared to a loss from continuing operations before income taxes of $1,597,000 in the third quarter of last year. As noted in yesterday's earnings release, the loss for the quarter - third quarter of 2017 included nonrecurring transaction expenses of $1,975,000, primarily related to the proposed 99 transaction. It should also be noted that during the third quarter of 2017, 6 of the company's restaurants in Florida were closed for a total of 36 days due to hurricanes. Such closures caused a decrease of approximately $650,000 in revenues in the third quarter of '17 and a decrease to income from continuing operations before income taxes of approximately $400,000, consisting of approximately $300,000 of lost restaurant operating profit and approximately $100,000 in food spoilage losses, cleanup cost and expenses associated with reopening those restaurants. During the third quarter of 2018, the company closed its restaurants in North Carolina for a total of 3 days due to the impact of Hurricane Florence. Management estimates the lost revenue of approximately $30,000 in the third quarter of 2018 is related to these closed days. During the third quarter of 2018, the valuation of the Black Knight Advisory Services LLC profit interest grant resulted in a profit interest expense of $1,240,000. This is up significantly from a profit interest expense related to this grant of $40,000 in the third quarter of 2017. Mark will give you further details related to this agreement with Black Knight in a few minutes. With respect to our bottom line results for the third quarter of 2018, the company posted a net loss of $633,000 compared to a net loss of $876,000 recorded in the same quarter of 2017. Results included an income tax benefit of $198,000 in the 2018 quarter compared to an income tax benefit of $832,000 in the corresponding quarter of 2017. The basic and diluted loss per share was $0.04 for the third quarter of 2018 compared to $0.06 in the third quarter of 2017. Adjusted EBITDA climbed 10.1% from $3,725,000 in the third quarter of 2017 to $4,100,000 in the third quarter of 2018. Our preopening expenses totaled $194,000 in the most recent quarter. That's up $146,000 over the third quarter of 2017. Our preopening expense is strictly a function of the timing associated with new restaurant openings year-over-year. Restaurant operating profit as a percentage of sales, or restaurant operating profit margin, is a metric we use to measure operating performance at the restaurant level. For the most recent quarter, restaurant operating profit margin was 9.7%, which compared favorably to 9.2% for the third quarter of 2017. Our cost of sales as a percentage of net sales decreased from the comparable quarter a year ago, moving from 32% in the third quarter of 2017 to 31.5% in the third quarter of 2018. Now this improvement was primarily due to the favorable impact of higher weekly sales averages. We remain cautiously optimistic that the beef market will continue to perform within acceptable parameters for the near term. Although we do anticipate some upward pressure on demand, we're not expecting any windfalls in pricing during the fourth quarter. On October 29, we opened our newest Stoney River Steakhouse and Grill in Troy, Michigan, in close proximity to one of our highest volume J. Alexander's locations. Our current expectations is that we will open up three restaurants in 2019. We will announce details once leases related to such sites have been executed. I will now turn the call over to Mark Parkey, our Chief Financial Officer, for remarks about the third quarter and an update on guidance for the remainder of the year. Mark?

[Mark Parkey:]

Thank you, Lonnie, and good morning, everyone. As Lonnie indicated, the third quarter always poses a challenge to our company with many of our guests eating at home, traveling for summer vacations or even evacuating their home base in the face of an oncoming hurricane, all of which can negatively impact our top line. So we were pleased with our same-store sales performance of both restaurant concepts, and as Lonnie noted, we are always glad when the third quarter is behind us. I will spend a few moments offering additional information related to activities that occurred during the most recent quarter, and then provide further financial highlights before closing with our revised guidance for the year. The average weekly guest counts within the same-store base of the company's J. Alexander's/Grills were down 0.6% in the third quarter of 2018 compared to the third quarter of 2017, while guest counts within our same-store base at our Stoney River restaurants were up 4.5% for the third quarter of 2018 over the third quarter of 2017. When all locations are included in the computations, average weekly guest counts within the J. Alexander's/Grills restaurants were down 2.4% in the third quarter of 2018 compared to the third quarter of 2017, while average weekly guest counts within the Stoney River restaurants increased by 5.2%. With respect to average guest checks, which include alcoholic beverage sales, the average guest check within the J. Alexander's/Grills collection same-store base of restaurants increased by 3.1% in the third quarter of 2018 to $31.84 from $30.87 in the third quarter of 2017. And the average guest check within the same-store base of Stoney River Steakhouse and Grill restaurants increased 0.9% to $42.67 from $42.29 in the third quarter of 2017. On a consolidated basis, average guest checks within the J. Alexander's/Grills locations increased 3.4% during the third quarter of 2018 compared to the corresponding quarter of 2017. And at the Stoney River restaurants, average guest checks increased by 0.5% during the third quarter of 2018 compared to the third quarter of 2017. The effect of menu pricing for the third quarter of 2018 was estimated to be a 2.3% increase for the J. Alexander's/Grill restaurants and a 2.4% increase for the Stoney River restaurants compared to the third quarter of 2017. Inflation in food costs for the third quarter of 2018 was estimated to total 0.9% for the J. Alexander's/Grill restaurants, with beef costs increasing by an estimated 1.3% compared to the third quarter of 2017. At the Stoney River restaurants, inflation for the third quarter of 2018 was estimated to total 0.2%, with beef costs higher by approximately 0.5% over the corresponding quarter of 2017. The company's restaurant labor and related costs as a percentage of net sales were 32.8% in the third quarter of 2018 compared to 32.6% of net sales in the third quarter of 2017. Other restaurant operating expenses were 21.1% of net sales in the third quarter of 2018, down from 21.5% of net sales in the third quarter of 2017. The company's operating loss for the third quarter of 2018 was $542,000 compared to an operating loss of $1,392,000 recorded in the corresponding quarter of 2017. Earlier, Lonnie highlighted the impact of the Black Knight Advisory Services LLC profits interest grant on the third quarter of 2018. The Black Knight profits interest grant, which was issued in October of 2015 has a quarterly valuation requirement. The noncash expense associated with the grant has been recognized over a 3-year vesting period and has been calculated each quarter based upon the most recent valuation performed using the Black-Scholes valuation model, with any cumulative change associated with the most current valuation impacting the most recent quarter. Primarily due to the $11.90 per share closing price of the company's stock at the end of the most recent quarter, the grant's valuation increased from $6,018,000 at July 1, 2018, to $6,761,000 at September 30, 2018. The company also incurred consulting fees of $139,000 under its management agreement with Black Knight in the most recent quarter compared to consulting fees of $120,000 in the third quarter of 2017. The final valuation of the Black Knight profits interest grant was calculated at the completion of the grant's vesting period on October 6, 2018, and resulted in a noncash credit of approximately $450,000, which will be recognized in the fourth quarter of 2018. The company's Board of Directors has authorized a share repurchase program, replacing the program that has been in place since October 29, 2015. The board authorized the company to purchase up to $15 million of its common stock in the aggregate over a 3-year period ending November 1, 2021. Under the prior program, the company repurchased 305,059 shares of common stock over 3 years for an aggregate purchase price of $3,203,000, using cash on hand and operating cash flow to fund such purchases. Share repurchases under the newly authorized program are expected to be made solely from cash on hand and available operating cash flow. Repurchases will be made in accordance with applicable securities laws and may be made from time to time in the open market. The timing, prices and amount of repurchases will depend upon prevailing market prices, general economic and market conditions and other considerations. The repurchase program does not obligate the company to acquire any particular amount of stock. Finally, based upon current information, guidance for the 2018 fiscal year is updated as follows

[Operator:]

[Operator Instructions] Gentlemen, it doesn't look like any one has registered for questions. If there are no further questions at this time, I'd like to turn the conference back over to Lonnie Stout for closing remarks.

[Lonnie Stout:]

Derek, thank you. We are now approaching the holiday season for 2018. As previously mentioned, we are aggressively creating and implementing initiatives to heighten guest awareness during this period of time, drive sales and generate trial in these few locations that are underperforming. If history is any indicator, we are optimistic that guests will ultimately respond favorably to these initiatives. We continue to be extremely pleased with the same-store sales performance at our Stoney River Steakhouse and Grill locations. Since acquiring this group in 2013, we have expended considerable effort to strengthen the concept of both food quality and professional service, and it's paying off. Today, our brunch program, which is in most of these restaurants, has been quite successful as has the addition of lunch to several locations. A better satisfied guest resulting in more frequent visits and an increasingly low guest base have been the primary drivers of same-store sales improvement. We are pleased with our momentum at Jack's Holdings. We continue to be committed to providing our guests with a compelling dine-in experience and sustaining our solid and consistent record of improving same-store sales. I want to thank all of you again for joining us this morning, and we look forward to communicating with you following our fourth quarter.

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a nice day.